Navigating a Weakening Economy
Many economic metrics, such as home sales, initial jobless claims, and purchasing manager surveys indicate that the U.S. economy is slowing. The question for investors is: what has historically worked in a weakening economy?
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Many economic metrics have been indicating weaker growth. The Conference Board’s Leading Economic Index has decelerated from +7.7% year-over-year in December 2021 to only 0.0% in July 2022, “suggesting recession risks are rising in the near term” according to The Conference Board.
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Historically, the relative performance of value stocks or those with low price-to-book ratios have been positively correlated with economic metrics such as payrolls and retail sales. We believe this is likely because value stocks comprise of more economically sensitive sectors such as financials, materials, and energy. So, as payrolls and retail sales increase, value stocks have historically performed strongly. In contrast, we believe growth stocks are typically more driven by market share gains and are less economically sensitive and have exhibited negative correlations to those economic metrics. As such, growth stocks have historically outperformed when payrolls and retail sales decline.
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Based on historical correlations, we believe that a weakening economy will potentially favor relative outperformance of growth stocks.
The views expressed are the views of Fred Alger Management, LLC (“FAM”) and its affiliates as of August 2022. These views are subject to change at any time and may not represent the views of all portfolio management teams. These views should not be interpreted as a guarantee of the future performance of the markets, any security or any funds managed by FAM. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.
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Price-to-book is the ratio that compares a company's market value to its book value. The market value of a company is its share price multiplied by the number of outstanding shares. The book value is the net assets of a company.
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